S&P Wins Bid to See U.S. Documents Behind Fraud Lawsuit

By Edvard Pettersson -
Apr 15, 2014

Standard & Poor’s will be allowed
to see government documents relating to the U.S. Justice
Department’s decision last year to sue the rating company and
not its competitors for issuing allegedly fraudulent ratings.

The McGraw Hill Financial Inc. (MHFI) unit won a court ruling
forcing the government to hand over potential evidence for its
defense that the lawsuit was retaliation for S&P’s downgrade of
U.S. debt two years earlier. U.S. District Judge David Carter in
Santa Ana, California, stopped short of giving the company
access to records of White House communications around the time
S&P issued the downgrade, saying it’s too early in the case’s
pretrial evidence-sharing phase.

The Justice Department is seeking as much as $5 billion in
civil penalties from S&P for alleged losses to federally insured
financial institutions who relied on its investment-grade
ratings of residential mortgage-backed securities and
collateralized debt obligations whose value evaporated with the
collapse of the U.S. housing market.

The Justice Department claims S&P’s ratings were not
objective and independent, as it told investors, but rather
driven by desire to win business from the issuers of the
securities who paid the company’s fees. S&P has denied the
allegations and has said it gave the same ratings to the
relevant securities as Moody’s Corp.

‘Renewed Motion’

“For now, the government must produce those documents that
are related to the selective-prosecution claim but are not
protected by the privileges that specially attach to the
Executive Office of the President,” Carter said in today’s
order. “Only after such discovery is propounded and considered,
will the court entertain a renewed motion to compel the
production of documents from the Executive Office of the
President.”

Ellen Canale, a spokeswoman for the Justice Department,
said officials are reviewing the judge’s order.

The judge also directed the government to provide S&P with
documents related to the objectivity and independence of other
rating agencies, as well as documents related to mortgage
lenders, financial institutions and issuers of the securities at
issue. The Justice Department had argued many of these documents
are privileged investigative files.

‘Broad Scope’

“None of the government’s grounds for withholding
production are availing,” Carter said. “In short, the
government’s obligation to produce documents is commensurate
with the government’s election to bring a suit of such broad
scope and magnitude.”

A sealed statement by a prosecutor in support of keeping
certain documents from being shared with S&P was too general and
sweeping, the judge said. The statement was prepared by John
Walsh, the U.S. attorney in Denver and the co-chairman of the
Justice Department’s Residential Mortgage-Backed Securities
Working Group.

The government would need to identify specific records and
explain why they can’t be shared, the judge said.

“We are pleased that the court granted our discovery
request and has compelled the DOJ to provide the information S&P
needs to fully defend against these meritless claims,” Edward Sweeney, a spokesman for New York-based S&P, said in an e-mail.

Carter denied S&P’s request to split the trial on the
government claims into two parts. The company had asked the
judge to limit the initial trial to 17 collateralized-debt
obligations for which Citigroup Inc. allegedly sustained losses
and said that a trial for all 158 securities that the Justice
Department has identified as the basis for its fraud claims
would be unmanageable.

The judge has said he wants the trial to start in September
2015.

The case is U.S. v. McGraw-Hill Cos., 13-779, U.S. District
Court, Central District of California (Santa Ana).

To contact the reporter on this story:
Edvard Pettersson in Federal court in Los Angeles at